Monday, May 20, 2013

The magazine cover indicator

There
are growing signs that the bull market is gaining greater acceptance among
mainstream investors. There has, for
instance, been a notable increase in the number of times the bull has appeared
on the front cover of mainstream financial publications. The latest instance of the bull showing up on
a magazine cover was in last week’s issue of The Economist, which proclaimed “The Bull is Back!”

Last
week also saw the appearance of the bull yet again on the front cover of Barron’s, along with the headline, “Dow
15,000: This Bull Has Room To Run.”

What
are we to make of this increase in bullish headline sentiment? The contrarian in us is tempted to conclude
the market is getting frothy and that a top could be approaching. But not so fast! The so-called “magazine cover indicator” is a
sentiment tool which works best at market bottoms. At tops the magazine cover indicator isn’t
nearly as reliable due to the fact that fear as an emotion tends to reverse
much faster than greed. That’s why
market declines often end with sharp, sudden V-type reversals whereas market
tops are much more jagged and irregular and can take several months before
finally reversing.

The
fact that The Economist has placed a
bull on its front cover is no cause for alarm.
While it could be a sign that the point of maximum recognition of the
bull market is approaching – and therefore a top – the latest bullish covers
are more a case of media belatedly acknowledging a trend that has been in place
for four years now. [Excerpted from the May 20 issue of Momentum Strategies Report]